There are typically two types of markets, a trending market; that is a market that's heading in a certain direction with the typical small retracement, and a ranging market trading within a channel. Being able to distinguish this could pose a challenge to a trader. This is where the Vertical Horizontal Filter (VHF) indicator for ThinkOrSwim comes into play. The Vertical Horizontal Filter (VHF) indicator measures the level of trend activity versus consolidation periods over a specified time frame. It calculates the difference between the highest and lowest prices over this period, then normalizes this value by the sum of price changes, providing a ratio that identifies whether the market is in a trending or a range-bound state.
Interpretation:
- High VHF values indicate trending markets, while low values suggest consolidation or sideways movement.
- At higher values and especially if the signal curve crosses the VHF curve would indicate the end of a trending market
- Lower values could indicate the start of a trend. The signal curve could help confirm that, but it's recommended to confirm with price action, volume, and/or a momentum indicator.
Vertical Horizontal Filter Features:
- Option to add a signal curve to help identify cycle change from trending to ranging or vice versa. It is recommended to use a low lookback period.
- The user has the option to add a cloud with the ability to customize the cloud color.
- The original VHF formula could be a bit choppy especially for smaller time frames. The user has the option to apply smoothing functions.
Review the screenshots below for setup options. Strategy samples are provided for guidance and ideas if applicable.
Note: If the Laguerre smoothing method is selected, the cross above/cross below logic will be inverted. This means, a change of status occurs when the signal crosses above or below the VHF curve as opposed to the other smoothing methods where the cross of the VHF above or below the signal is the signal for a status change.
Review the screenshots and video for setup options.
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